Gold holds gains as Greek crisis bubbles, FOMC eyed

<p>Five-tael (6.65 ounces or 190 grams) gold bars are seen at a jewellery store in Hong Kong in this April 21, 2011 illustration photo.Bobby Yip</p>

NEW YORK (Reuters) - Gold rose for a third day on Tuesday, fueled by a weaker dollar and doubts that the Greek debt crisis was completely resolved even after the government survived a late night confidence vote, as expected.

Bullion was little changed immediately after the vote result just prior to 6 p.m. EDT (2200 GMT), suggesting investors were looking further ahead toward an even tougher test next week when the government seeks parliamentary approval for new, deeply unpopular spending cuts and tax hikes.

Gold rose about 0.4 percent during Tuesday trade, buoyed in part by gains in grains and equity markets as investors took some solace in predictions that Prime Minister George Papandreou's government would withstand the vote. The euro briefly rose after the result, extending the day's gain.

"Gold has been split between taking its cue from the changes in sovereign risk, but today the sovereign risk has declined and the euro ... has rallied and gold is choosing to track the euro more than it is the reduction in sovereign risk," said James Steel, chief commodities analyst at HSBC.

Spot gold traded at $1,547.30 an ounce as of 6:13 p.m. EDT (2213 GMT), up by about 80 cents prior to the vote.

U.S. August gold futures settled up $4.40 at $1,546.40 an ounce on Tuesday, after trading between $1,539.30 and $1,549. Volume was below 90,000 lots, Reuters preliminary data shows, set for one of the lowest daily volume of the year and about 60 percent below its 30-day average.

Silver touched $36.54 an ounce, its highest since June 10, and was last up 1.4 percent at $36.51.

On the options front, gold volatility has dropped by nearly one-fifth from its peak in mid-May, as prices of the underlying gold futures have largely been rangebound after rallying to a record $1,575.79 on May 2.

The CBOE gold volatility index .GVX, a bullion market fear gauge, fell nearly 4 percent to below 17, near its lowest level in two months, as the price of the underlying gold futures moved in a narrow range between $1,510 and $1,550 in the last 30 days.

Jonathan Jossen, an independent COMEX gold floor option trader, said a major dealer sold a sizable position in straddles. A straddle is an options plan in which an investor aims to profit on volatility through a call and a put with the same strike price and expiry date. Sale of a straddle position indicates that less volatility is expected.

"If you think there is volatility, you don't really do that. I am not seeing anybody put on a play for a move," Jossen said.

Also supporting gold was a report by the International Monetary Fund that Spain faces considerable risks to its recovery and must deepen and conclude reform work to allay market concerns.

GOLD RALLIES IN EURO, STERLING

Gold in euros, which is less than 1.5 percent below a record 1,088.11 euros an ounce, was trading down 0.2 percent on the day, reflecting the pick-up in the single European currency against the dollar.

"Gold is inextricably linked to the events in Greece, both gold and silver are hostage to contagion fears," said RBS analyst Nick Moore.

Gold priced in sterling will breach resistance at 950 to 955 pounds, said independent investor Dennis Gartman. Sterling-priced gold hit a record 954.63 pounds on Monday.

Financial markets now look forward to the U.S. Federal Reserve's policy statement on Wednesday, as a massive $600 billion bond-buyback program, the second round of quantitative easing dubbed QE2, is set to conclude by the end of June.

Bullion investors will also pay close attention to talks over U.S. debt limit, as U.S. lawmakers launched a crucial week of debt-reduction talks seeking to break through differences on taxes and healthcare.

Among platinum group metals, platinum was up 1 percent at $1,743.74 an ounce, and palladium gained 2.8 percent to $764.72 an ounce.